Impact markets as a mechanism for not loosing your edge
Here is a story I like about how to use impact markets to produce value:
- You are Open Philanthropy and you think that something is not worth funding because it doesn’t meet your bar
- You agree that if you later change your mind and in hindsight, after the project is completed, come to think you should have funded it, you’ll buy the impact shares, in n years. That is, if the project needs $X to be completed, you promise you’ll spend $X plus some buffer buying its impact shares.
- The market decides whether you are wrong. If the market is confident that you are wrong, it can invest in a project, make it happen, and then later be paid once you realize you were wrong
The reverse variant is a normal prediction market:
- You are Open Philanthropy, and you decide that something is worth funding
- Someone disagrees, and creates a prediction market on whether you will change your mind in n years
- You’ve previously committed to betting some fraction of a grant on such markets
- When the future arrives, if you were right you get more money, if you were wrong you give your money to people who were better at predicting your future evaluations than you, and they will be more able to shift said prediction markets in the future.
So in this story, you create these impact markets and prediction markets because you appreciate having early indicators that something is not a good idea, and you don’t want to throw good money after that. You also anticipate being more right if you give the market an incentive to prove you wrong. In this story, you also don’t want to lose money, so to keep your edge, you punish yourself for being wrong, and in particular you don’t mind giving your money to people who have better models of the future than you do, because, for instance, you could choose to only bet against people you think are altruistic.
A variant of this that I also like is:
- You are the Survival and Flourishing Fund. You think that your methodology is much better, and that OpenPhilanthropy’s longtermist branch is being too risk averse
- You agree on some evaluation criteria, and you bet $50M money that your next $50M will have a higher impact than their next $50M
- At the end, the philanthropic institution which has done better gets $50M from the other.
In that story, you make this bet because you think that replacing yourself with a better alternative would be a positive.
Contrast this with the idea of impact markets which I’ve seen in the water supply, which is something like “impact certificates are like NFTs, and people will want to have them”. I don’t like that story, because it’s missing a lot of steps, and purchasers of impact certificates are taking some very fuzzy risks that people will want to buy the impact-NFTs.
- Although in the end this kind of setup could move large amounts of money, I’d probably recommend starting very small, to train the markets and test and refine the evaluation systems.
- Note that for some bets, Open Philanthropy doesn’t need to believe that they are more than 50% likely to succeed, it just has to believe that it’s overall worth it. E.g., it could have a 20% chance of succeeding but have a large payoff. That’s fine, you could offere a market which takes those odds into account.